iPads and Chia Pets

By now I am sure just about everyone has read that Apple’s Tim Cook has announced that Apple will start making some computers in the United States. Lots of blather about the USA not having the engineering talent, the schools not generating tool and die makers and on and on … all of it nonsense. The United States, for all of the manufacturing loss over recent decades, still has the most technically capable people in the world.

It is apparent that Tim Cook and Apple don’t really know why they left the USA for Singapore and Ireland, at first, then to China for their manufacturing. They think it was because of labor costs – they sincerely believe that – but it wasn’t. And they are very likely to fail in their US manufacturing venture, and they will probably think it is somehow attributable to people when they do. In fact, it has nothing to do with labor in the USA, Singapore, China or anywhere else. They will fail because they do not understand how to run a truly integrated manufacturing company. Few of the Fortune 500 companies do. Instead, they all pursue the same business model as Joseph Enterprises – the Chia Pet folks (who incidentally outsourced manufacturing first to Mexico and now to China).

Both Apple and the Chia guys have design and their sales effort completely disconnected from manufacturing. Their common goal is to conjure up something completely new that a slew of people will want – then sell as many as they can as fast as they can in as many places as they can. Whoever is manufacturing the iStuff and Chia stuff is tasked with figuring out how to ramp up the factory to meet the demand. As anyone who manages manufacturing knows, the steeper the ramp up, the more demand exceeds planned capacity, the more difficult (and costly) it can be. But the Apple and Chia business models are actually aimed at creating just that manufacturing challenge – make that ramp up as steep as possible.

Of course, sometimes it doesn’t work. They latest model doesn’t sell like hotcakes. When that happens someone is left holding the bag in terms of the cost of all that manufacturing capacity – expensive to own when it is sitting idle.

That disconnected approach – cut the innovators and sellers loose and tell manufacturing to chase them and do whatever it takes to keep up – works well enough when demand is high and growing. It worked well for Apple from the early 80’s to the mid 90’s. But when Apple missed the boat with its PC designs and sales dropped, the cost of all that idle capacity was staggering. Apple’s solution was to get out of manufacturing – contract it out. Make all of those capacity challenges and costs someone else’s problem.

In China, Apple has found that their friends at FoxConn can house people in dorms right at the factory and compel them to work sixty hours or more a week to handle the ramp up when demand is hot – and not worry about the implications of cutting them all loose and tossing them out on the streets if the time comes when demand dies. Make all that investment in capacity FoxConn’s problem if the factory is idle.

When you own factories in the United States, however, it is a much different story. You can’t force people to work 60+ hours a week and there is a price to pay – both a financial price and a PR price – when you dump them in huge numbers onto the unemployment line.

Wall Street loves that business model – when demand for Blackberry’s is going through the roof they invest in RIM (the Blackberry maker); but when Apple comes up with a better phone, they can dump their RIM stock and put their money into Apple. Whatever happened to all of the people and manufacturing assets it took to make Blackberries isn’t their problem.

That sales driven business model – all sales increases are good no matter what the implications may be to manufacturing capacity utilization – is standard operating procedure for companies that really don’t understand that they are a manufacturing company.

Toyota’s success has largely been due to the fact that they do understand. The huge driver of profitability ( or lack of it) in manufacturing is not labor cost – it is capacity utilization. Meteoric sales one year, followed by a precipitous drop the next, and then another meteoric rise the next is what happens to innovation and fad driven companies. Manufacturing is expected to drag that huge factory money pit up the mountains and down into the valleys chasing sales. Lurching from willy-nilly hiring, excessive overtime and pedal-to-the-metal supply chain expediting one year to massive layoffs and idle machines the next

Toyota doesn’t play that game. Their entire business model is driven by a goal of being just a hair under 100% capacity utilization. A sales increase of 20% is just as bad as a sales drop of 20% – either scenario misaligns sales with capacity and results in large scale wastes of money.

That takes a long term view of things. It takes a sales and pricing strategy based on a goal of slow, steady growth over decades – not selling as much as they can of whatever they can to whoever they can. It takes a product strategy of continually cranking out solid, dependable, reliable products, rather than trying to come up with the next huge selling fad. In the proverbial race, they are the tortoise to just about everyone else’s hare.

The folks at Apple are dreaming about an Apple TV that will shoot sales back through the roof; and the folks at Joseph Industries have high hopes that the Chia Kung Fu Panda will do the same. If so, the factories in China will wear people out by the thousands to keep up, but their bets are hedges and those Chinese folks will be sitting on their hands doing nothing if they fad moves in a different direction.

A company like Apple can’t manufacture well no matter where they do it so long as they are driven by the Chia Pet economic model. Without being capacity driven they cannot provide stable employment, which precludes them from having stable processes and a kaizen culture. That can only happen when the driving objective is driven by a clear understanding that profits are maximized over the long haul by operating at that full capacity sweet spot, which takes a level of sales, manufacturing and accounting integration few companies are willing to pursue. The allure of making a lot of money now and worrying about the future in the future is just too great.

I doubt that whether Apple used Samsung or not that it would have prevented Samsung from getting into the Smart Phone marketplace after all Samsung has been making phones for a long time, and being able to invent is nothing new for them either, they have in fact created a range of innovative products including something esential to every laptop LCD screens. The two giants of Korea are by far the leaders in the television production field.

Add to that their ability to cross market since they make a lot of things other than just phones. People who have boughten tv, and appliance or other electronics from either LG or Samsung will naturally lean towards their phones as well. Tack on these two comapnies rarely worry about protecting their innovations, as they realize they can be reverse engineered with ease anyway, in fact it is better to make sure your innovation becomes the standard by allowing anyone to use it.

LG and Samsung and for that matter many other Korean manufacturers instead focus on providing quality, service, and value to their customers by building a relationship with them. That relatioship then helps them improve their products even more so that they eventually become a dominate force in the market. They just go out and work to stay just one step ahead of their competition.